M/S. SAROVAR ENTERPRISES,RAIGAD vs. ASSISTANT COMMISSIONER OF INCOME-TAX,

PER D. KARUNAKARA RAO, AM :

This appeal is filed by the assessee against the order of CIT(A)-2, Thane, dated 29-08-2016 for the Assessment Year 2010-11.

“1. The Ld.CIT-Appeal has erred in law and on facts in sustaining/confirming addition/disallowance of bad debts written off advance paid Rs.7,50,000/-. For purchase of land, inspite of clear provision of law in this respect.

Developer. Assessee filed the return of income declaring total income of

Rs.3,99,360/-. Assessee’s case was selected for scrutiny and notices were

issued on the assessee. Assessee is engaged in construction of a project

“Kanak Sarovar” at Thana Naka, Panvel. During the assessment year

under consideration, the net profit of the assessee after remuneration to

partners is shown at Rs.3,99,357/-. In the scrutiny proceedings, the AO

noticed that assessee debited an amount of Rs.7,50,000/- on account of

advance written off. AO opined that the said advance amount/expenditure

does not form part of on-going project and by no stretch of imagination it

constitutes a “revenue” expenditure. Accordingly, AO added the same to

the total income of the assessee. Eventually, the AO determined the

assessed income at Rs.12,49,360/- after making addition of Rs.7,50,000/-

(debts written off) and Rs.1 lakhs adhoc disallowance on account of

expenses made on purchases.

Rs.7,50,000/- on account of advances written off. Relevant facts of this

issue include that the assessee paid the said amount as advance for the

purchase of land near Sortya Maruti Devsthan, Panvel. The said purchase

transaction not only failed to materialize but also the assessee failed to

recover the said advance. Therefore, this said failure resulted in write off

of the said advance and debiting the same to the profit and loss account

for the year under consideration. At the end of the assessment

proceedings, AO held that the claim of the assessee is not allowable as the

said advance is in the nature of capital. He further mentioned that the

advance given by the assessee has nothing to do with the on-going project

of the assessee.

arguments. He also filed written submissions and the same are extracted

in Para No.6 of the CIT(A) order. Accordingly, it is the case of the assessee

that he is engaged in the business of Real-estate and it involves purchase

and sale of land as a part of the business activities of the assessee. Giving

advances is on trading account and therefore, when the said advance is

written off, the same constitutes an allowable Revenue/business

expenditure. Assessee raised the issue that the officers have erroneously

invoked the provisions of section 36(2) of the Act which is inapplicable to

the business transactions. On considering the same, CIT(A) dismissed the

submission of the assessee holding that the assessee failed to discharge

the onus in furnishing the credible evidences and documents to establish

the existence of plot of land with said Sortya Maruti Devsthan, Panvel,

attempts of the assessee in recovering the same, reasons for aborting of the

said transaction etc. Contents of Para No.7.4 constitutes an operational

para, therefore, the same is extracted here as under :

“7.4 From the above facts it is seen that the Ld. AR could not file any credible documents, namely copy of agreement for purchase of land, cancellation deed, reasons for cancellation of deal, steps taken for recovery of advance, confirmation from the party concerned regarding receipt of advance, plot details, Khasra no., size of the plot etc. in support of his above claim, therefore, the purpose of said advance could not be established. During the year under consideration, the appellant had declared the total turnover of Rs.3,41,85,821/-, opening WIP Rs.7,82,11,158/-, closing WIP at Rs.5,30,90,834/-, from construction business and declared a meager profit of Rs.3,99,357/- @1.6% only. These facts clearly establish that the appellant had suppressed its taxable income by writing of so called advance of Rs.7,50,000/- as above. The Ld. AR has squarely failed to furnish any credible documents which can establish the existence of land/plot with Sortya Maruti Devsthan, against which, so called the advance of Rs.7,50,000/- was given. In view of these facts, in my considered opinion, the appellant has squarely failed to establish the nature and purpose of said transaction, i.e. for business purpose or otherwise, therefore, the same cannot be allowed. Accordingly, the disallowance of Rs.7,50,000/- made by the AO is sustained. ...........”

11-2016 and 20-02-2018, there is none to represent the case of the

assessee before us. Considering the smallness of the addition as well as

the availability of the assistance of Ld. DR for the Revenue, we find it

appropriate to adjudicate the appeal based on the information before us.

particular, Ld. DR for the Revenue submitted that this is a case where

essentially the AO had to disallow the claim of the assessee of

Rs.7,50,000/- for want of evidences and details. Failure to establish the

business connection of payment of Rs.7,50,000/- for purchase of the land

is a matter of fact and the same can be decided only based on the evidence

or agreement or correspondence between the parties. The names and

addresses of the payees are not available on record to explain the nature of

the transaction leave alone the business nature of it. It is also evident that

the manner of payment, purpose of payment, reason for debiting the

transaction to the profit and loss account are not available on record.

Considering the same, it is the request of the Ld. DR for the Revenue that

the addition made by the AO should be confirmed.

perusal of the orders available on record, we are of the opinion that there is

no dispute about the assessee’s business activities, i.e. Builder and

Developer. Assessee has recorded the sales turnover of Rs.3.42 crores

(rounded off) in the year under consideration. The closing WIP is reflected

at Rs.5.21 Crores (rounded off). Considering the same, we are of the

opinion that there is no dispute about the assessee’s business of dealing

with the developer of land and buildings. Therefore, the payment of

advance of Rs.7,50,000/- for the purchase of the land as part of business

activity, need not invite any suspicion or surmises.

The next limb of the same issue relates to write off of the said

advance of Rs.7,50,000/-. In our view, so long as payment of advance is

for the purchase of the land, the same ought to constitute the business

activities of the assessee. Consequently the same falls within the scope of

Revenue. Accordingly, the loss by way of advance not recovered by the

assessee constitutes an allowable business loss u/s.28 of the Act. In our

view, this aspect of the assessee’s submission is completely ignored by the

revenue authorities. AO and CIT(A) were merely invoked the provisions of

section 36(2) of the Act. Considering the nature of advance as well as the

assessee’s decision to write off the same in the year under consideration,

we are of the opinion that the same constitutes an allowable expenditure.

Even if the said advance is given in the context of any aborted business

project of the assessee, the same is allowable u/s.28 of the Act.

Accordingly, the grounds raised by the assessee are allowed.

Order pronounced on this 21st day of March, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (D.KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 21st March, 2018. Satish आदेश क� आदेश क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT(A)-2, Thane 3. आयकर आयु� / The CIT-2, Thane 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “एक सद�य 5. एक सद�य एक सद�य” / एक सद�य DR ‘SMC’, ITAT, Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार देशानुसार देशानुसार/ BY ORDER,स देशानुसार

स�यािपत �ित //True Copy// //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune